Why VIX Futures Got Slammed

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

Volatility had a soft day on Monday.

With the weekend effect taken into account, I have the real movement in the VIX down about 0.70.

Volatility futures, though, got SLAMMED.

Take a look at the across-the-board drop in the futures curve from Friday to Monday:

Front month futures dropped 0.75 in November and 0.80 in December …

A nice plastering of volatility.

This is why iPath Series B S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) and  ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) were down so hard.

However, it is not over yet …

With the VIX at 15.25, and the front month future at 18.45, we still have massive contango in the front month and second month.

If VIX falls much further, or even just sits, we could see the November future below 17.5 by Friday.

What does this mean?

Puts in VIX are going to have an easier time than calls (then again, they almost always do).

UVXY could drop below 15 by Friday, and VXX could be below 20.

If you do want to hedge, the VIX Nov 19-24 call spread is cheap.

Your Only Option,

Mark Sebastian

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